Tuesday, May 15, 2018

LUNA First Quarter Conference call - my thoughts and comments

Luna Innovations Incorporated (NASDAQ:LUNA) Q1 2018 Earnings Conference Call May 9, 2018 5:00 PM EThttps://seekingalpha.com/article/4172029-luna-innovations-luna-ceo-scott-graeff-q1-2018-results-earnings-call-transcript?part=singleMy Note: I listened to and participated in last week's LUNA INNOVATIONS Q1 conference call. My impression is that this company is finally "hitting on all cylinders" and in a variety of cutting edge technologies with real legs to make a run in the market place. CEO Scott Graeff noted that, Luna's first quarter revenues increased 21% or $2.1 million year-over-year contributing more than $1 million to Luna's bottom line. Revenues from Luna's products and license segment grew 29%, and sales from Luna's Lightwave division grew 74%. Scott advised that the Lightwave division includes Luna's instruments for testing optical components and networks which target the growing demand for bandwidth fueling the development of silicon photonics and the building of more and more data centers. This division also includes the sales of Luna's Odyssey instruments used for measuring structural health and integrity. Scott also had the following comments about the Terahertz division, in Ann Arbor, Michigan:Scott Graeff

On the Terahertz side, I discussed last quarter, our new leadership in that group and the traction taking place across the Terahertz organization whether in sales, engineering or manufacturing. The group continues to gain momentum and recognized a 29% increase in revenues in Q1 compared to a year ago. We are increasing our marketing presence for the Terahertz platform with much greater tradeshow presence.

We plan to participate in 10 shows this year with four shows already completed in 2018. For comparison, we only completed four shows in all of 2017. Additionally, we are gaining efficiency in our operations, for instance since January 1, w have reduced our time to build a system by 27% taking 67% of the engineering hours out of the build and lowered overall cost of goods sold by nearly 10%. These important measurements are critical to the growth that we expect and a true testament to the outstanding work being done in our facility.

Here are my questions and comments:

Randy Knudson

Good afternoon. On the last conference call you talked about ODiSi becoming or you're hopeful that it might be recognized as the industry standard for composites or in composite testing and maybe I misunderstood that. So has there been any -- how do you achieve that. I guess is the first question, where are you and where are we in terms of being recognized as the industry standard for testing composite products.

Scott Graeff

Yes. I'm going to let Brian answer that. I know I will say that it is top of our priority list. We believe it is important and we are going down that path and doing everything we can. I will say you're dealing with some bureaucratic organizations and there is a process involved in going through that. I'll let Brian who is very involved in this talk a little bit more.

Brian Soller

Yes, sure. Hi, Randy. I think there are standard bodies that deliver essentially confirmed documentation with regards to what would be considered a standard and test for materials -- all different types of materials. And we've identified two standards bodies that we believe the most relevant to our Odyssey products and using fiber optics to measure composite materials. And we have over the last year engaged with those committees -- at the committee level with those bodies. And we are now members of at the committee level teams that are working on new standards and the partnership between the standards body and other corporate entities in Luna to develop standards over the course of time that would include our technology.

You have to be careful with this, as Scott mentioned that they are fairly bureaucratic organizations, so it can take some time. But over the last year we have gotten engaged with what we believe to be the right folks in the right standard bodies and over the next 18 months or so I think we'll see some real progress.

Randy Knudson

Let me ask a follow up question if I could. In terms of competition without naming competition, is there significant competition in this market, are you the only -- are we the only people that's really doing this kind of testing?

Scott Graeff

That’s a good question. The competition that we have in this market is really other types of measurement technology.

Randy Knudson

Okay.

Brian Soller

So whether these electrical strain gauges or thermocouples or stand offs temperature detection using a flare type instrument. So there's competition -- a lot of competition from other technologies. We bring some very specific benefits to these types of measurements and there's not a lot of direct head-to-head competition with the way we make these measurements using fiber optics.

There certainly are other fiber optics techniques on the market. They'll have different benefits they bring. Ours is pretty unique though in terms of the combination of resolution and accuracy that we can achieve. So I hope that answers the question.

Randy Knudson

No. It did. And one of the technologies that I've seen and in fact I think in Ann Arbor, aren’t they using Terahertz to evaluate airplanes -- various parts of airplane hulls or in various modalities, isn't Terahertz being used?

Brian Soller

Yes. Our Terahertz technologies used to measure layered thickness and quality of coatings for different types of aerospace and many other applications actually. It's not an apples-to-apples to exactly what we're measuring with fiber optics but you can think of them as complimentary.

Scott Graeff

Randy, if you were ever out in the Ann Arbor area, it's a very disruptive technology. I'd welcome you to come in and meet the folks out there and see it firsthand.

Randy Knudson

I appreciate that. And what's the thoughts in terms of when -- how long are they going to stay in the current facility or are the plans to move out?

Scott Graeff

Yes. Our lease -- like I talked before our lease is through the end of this year. It is not ideal space. We're within -- we're kind of where we were mixed in with the Macom facility as well. So we're evaluating that right now looking at where we go from here. But that is a kind of a mid-year decision point as far as where we're going.

Randy Knudson

Yes. Great. In terms of Terahertz, are there any new value added resellers, I was really been impressed with some of the press releases where we can see, I think five significant value added resellers selling in different aspects of using Terahertz in various products whether it's plastic paper, whatever but are there other --are there new value added resellers on the horizon. Are there new markets in that area?

Scott Graeff

Well, we are active in that and the guys out there and the folks out there have done a nice job, Margaret and Irl and John and Steve in signing up some additional VARs and some additional distributors and some reps. So I don't have them the names of them at my fingertips right now. But that is an active approach and you're dead on with when you get into a specific market many times it requires a specific VAR or a specific rep that knows that business it’s not just saying. Let me just broad stroke Terahertz technology out here. It's where we're going after and who has those contacts. So we are active in that and I can follow up with you with the names. I just don't know right now.

Randy Knudson

Well, I appreciate that and overall just really impressed with what you gentlemen have done and so thank you for answering my questions.

Scott Graeff

Thanks Randy.

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One of the most insightful comments came from an unidentified institutional investor who strongly encouraged management to consider a stock buy back as Luna has approximately 38 million dollars it is holding from the sale of it's HSOR division. I concur whole -heartedly.

Unidentified Analyst

But, and correct me if I'm wrong on any of that, but what I have learned over the years is that the one business that you know best is, your business and with the amount of cash on the balance sheet returning some cash to shareholders by buying back more stock who would seem to be a very good use for some of the cash because if we want a money market fund we can put money in the money market fund. So, I don't want you to just buy something because you want to put the cash to work. Why not concentrate on buying back some of the shares at these prices because you certainly know your business best.Finally Scott noted that the Technology Development segment, which represents funded research under U.S. government contracts, grew 9% year-over-year. Scott touted the diverse team and their ability to win Phase 1 feasibility projects and to extend them into larger development programs at a higher conversion rate with a breadth and depth of the IP portfolio that has been created. There are solid synergies from having this division as it relates to LUNA's ability to innovate quickly and efficiently. Overall, it was a very positive report which portends good things for the future across the board. This of course is my opinion, and it's not investment advice. Perform your own due diligence.